Investors usually associate insider trading with illegal conduct, but not all insider trading activity is illegal. In fact, most corporate insiders buy and sell securities in a perfectly legal way. Of course, there are numerous cases of illegal insider trading, but most insiders tend to play by the rules imposed by the Securities and Exchange Commission when buying or selling shares. But what is the difference between legal and illegal insider trading? Let’s take a look at an old example to draw a line between the two types of activity.
In 2013, the former CEO of ImClone, Samuel Waksal, sold a $5 million stake, as well as his daughters’ holdings in the company, after finding out that the Food and Drug Administration had rejected ImClone’s main drug, Erbitux, for the treatment of cancer. Mr. Waksal traded on material non-public information, for which he was sentenced to seven years in prison and fined $3 million after pleading guilty to insider trading and fraud. Leaving this discussion aside, the following article will discuss the recent noteworthy insider trading activity registered at five publicly-traded companies.
Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Embattled Biopharmaceutical Company Registers Insider Buying
Catalyst Pharmaceuticals Inc. (NASDAQ:CPRX) has witnessed increased insider buying in the past several weeks, so let’s have a brief look at the most recent activity. Board member Charles B. O’Keeffe purchased 20,000 shares on Tuesday for $0.81 each, lifting his ownership to 432,126 shares.
The biopharmaceutical company focused on developing therapies for people suffering with rare debilitating diseases has lost 67% of its market value since the start of 2016, after the company received a ‘refusal to file’ letter from the FDA regarding its New Drug Application (NDA) for Firdapse. The investigational drug candidate was designed for the treatment of patients with Lambert-Eaton Myasthenic Syndrome, a rare and occasionally fatal autoimmune disease characterized by muscle weakness. The letter stated that the FDA had found Catalyst Pharmaceuticals Inc. (NASDAQ:CPRX)’s application “not sufficiently complete for review”. In late April, the company disclosed that the FDA requires positive results from an additional study of patients with LEMS, which put even more pressure on Catalyst’s stock. Kevin Kotler’s Broadfin Capital had 8.20 million shares of Catalyst Pharmaceuticals Inc. (NASDAQ:CPRX) in its portfolio at the end of March.
The next two pages of this insider trading article will reveal the latest noteworthy insider selling activity witnessed at four companies.